What if Elon Musk doesn’t go through with the takeover of Twitter? On April 27, a Reuters op-ed raised the issue and quickly resonated with the press and some analysts. The billionaire, often unpredictable, has a bad reputation when it comes to meeting his obligations, to the point where a site lists his promises that go unanswered.
Some see a mood in the brutality of his takeover of Twitter that could only be temporary. Elon Musk went from simple user to first shareholder, then board member, then a candidate for the buyout of all the social network’s shares in less than a month, giving the impression that he is constantly opinion about his project for Twitter.
But when he signed the deal for his $43 billion bid with the company’s board of directors on April 25, he made several commitments. Result: if a possible failure of the transaction cannot yet be ruled out, it will in any case not be the sole will of the entrepreneur.
Elon Musk has (almost) no way out
†The agreement signed is different from the one initially proposed by Elon Musk in his first letter, which was received by everyone with amazementLa Tribune reported Pierre-Emmanuel Perais, M&A attorney at Linklaters.It is ultimately not a takeover bid, but a consensual agreement, unanimously approved by the board of directors.†
Specifically, the leaders of Twitter have signed a contract tying the social network to a company owned by Elon Musk – a tentative empty shell, made for the occasion. Who says contract, says obligations between both parties, both during the conclusion period of the agreement (the deadline of which is October 24, 2022) but also afterwards. For example, Elon Musk must give his approval if certain strategic decisions are made for the company. †The contract is binding on both parties and the departure conditions are very limited‘, the specialist recalls.
†Elon Musk can’t get out of the contract unless it’s in the contractKarl Hepp de Selevinges, associate attorney at Jeantet, also an M&A specialist, adds. The clauses of the contract between Twitter and Elon Musk are “classic”, the lawyer judges.significant side effects“, a slang term to evoke”events that jeopardize the economy of acquisitionBut the threat must be particularly serious, both substantively and in time. Karl Hepp of Selevinges cites a case where the acquired company lost 90% of its turnover in the period between the signing of the contract and its termination, or even a case where one of the managers of the acquired company has embezzled 2.6 million euros from the company.Conversely, major trends with macroeconomic effects, such as the war in Ukraine or the Covid-19 pandemic, cannot activate the clause Finally, even if the clause is rightfully activated, Elon Musk has committed in the contract to pay a $1 billion fine in the event of cancellation of the operation.
In short, it is very unlikely that these termination clauses can be invoked. On the other hand, two conditions precedent could put an end to the agreement before its completion, and they will be followed closely in the coming months.
The vote of the general assembly of Twitter, a step in danger?
The first condition precedent would be a negative vote from Twitter’s general meeting (GA) against Elon Musk’s proposed takeover offer. In the next two or three months, after the publication of other documents related to the transaction, the shareholders of the social network will meet. If more than 50% of them accept the offer, there will be a simple majority and all shares of the company will be sold to the businessman.
†As long as this vote has not been obtained, the agreement will not be concluded. In the case of Twitter, the vote has a political dimension in addition to the financial one, because of the positions taken by Elon Musk. We can therefore expect activism from some shareholders who are against the agreement. But it’s hard to imagine that the political aspect will overtake the financial aspect in the final decisionPierre-Emmanuel Perais concludes.
Some shareholders, such as Prince Al-Walid bin Talal representative of the Saudi sovereign wealth fund, have already expressed their dismay at the price of the operation and have confirmed that they will oppose it. Problem for them: the procedure does not provide for a blocking minority. If they maintain their opposition but the deal is voted on, they will still appeal to the Delaware Court. The latter will have the task of checking whether the price offered is reasonable, and will have to propose a more interesting agreement for the sellers if it is not.
†Delaware law imposes fiduciary duties on the board of directors. It focuses on premium [différence entre le prix proposé et celui du marché, ndlr] of Elon Musk’s offering, and he’s not going to look at other metrics, such as the intrinsic shareholder value of the offeringPierre-Emmanuel Perais recalls. At a premium of 38%, the billionaire has made an offer that seems sufficient to navigate these remedies.
By the time the vote takes place, another danger could disrupt the operation: the arrival of a “white knight” at the last minute. If an alternative buyer for Elon Musk has not yet made itself public, it is not too late to do so as long as the general meeting of shareholders has not voted on the acquisition. In a better offer, the board of directors would be legally obliged to put it to a vote. However, for Elon Musk, this risk is mitigated by certain mechanisms of the contract. For example, he must be aware of competing offers and he retains priority if he adapts to the new price. Another clause prevents Twitter from asking for offers. “There is no doubt that the company’s board of directors consulted other potential buyers before signing the agreement“However, Pierre-Emmanuel Perais notes. And if the leaders signed the contract, it is because they would not have found an alternative. “Once the consent of the general meeting is obtained, this danger will no longer exist, as it will be too late for a third party to intervene.‘ concludes the lawyer.
The passage for the supervisor, a formality?
The second condition precedent is a prohibition issued by the financial watchdog (the SEC) or the competition watchdog (the Federal Trade Commission), which will review the transaction.
†The FTC will conduct a verification process, but there is only a very low risk of the buyout being denied for competition“, Karl Happ de Selevinges diagnoses. Elon Musk’s business portfolio is currently mainly industrial with Tesla (electric cars), SpaceX (rocket and satellite) or The Boring Company (transport tunnels). In other words, sectors that are a long way from those from the media and social networks, where Twitter stands out, not enough to mobilize the regulator.
†Elon Musk, on the other hand, has a history with the SEC. He had to resign from Tesla because of certain tweets“, the lawyer recalls. In 2018, the financial police officer had pushed the billionaire to the exit after tweets about his financial projects for the company – which he should have presented to shareholders in advance. If he is very unlikely that the SEC will approve the transaction However, it could fine Elon Musk for the details of the modus operandi of his offensive against Twitter.
Twitter has issued clauses against Musk’s escapades
†Twitter has added a very specific clause to the contract, regarding the identity of Elon MuskPierre-Emmanuel Perais slips. If the company was affected in any way by Elon Musk’s comments, it could not be taken into account in the termination criteria.This is the end of Twitter, because Elon Musk could have tried communication maneuvers to destabilize the company and conclude that he could no longer buy it‘ the lawyer evaluates.
The consequences of the agreement prove the social network law. Since his offer was accepted by the company’s board of directors, the capricious billionaire has not kept quiet, on the contrary: he has multiplied sharp tweets about the economic model of the social network, freedom of expression or the decisions of certain leaders . However, another clause of the contract — integrated into a standard communication clause — touches on Elon Musk’s tweets: He is expressly authorized to comment on the transaction, provided his posts do not denigrate the company or its leaders. †Twitter took Musk’s history into account and this clause proves that the council had reservations about his personality. Rarely have I seen a personality crystallize risk so strongly in acquisition filesPierre-Emmanuel Perais remarks.